While making earning lots of money somehow is great you need to learn why saving money is the most important for FIRE. Its by far the most important skill to learn! Let’s dive in.
So you want financial independence. You have your super spiffy investment calculators and a lead on a wicked hot stock pick from a friend who knows a guy. You have visions of being the next wolf of Wall Street and having insane parties. You are ready to start your journey to financial freedom.
Well that sounds great but you are doing FIRE wrong.
Fancy investments are not the way to save for early retirement
You are doing FIRE wrong
You can do all that fancy investing stuff someday if you really want to but it is 100% the wrong place to start.
There is one thing you need learn and work on before you stand a chance at financial independence.
You need to learn why saving is the important for FIRE. Then you need to learn to save your money. Its not important to create some complicated stock purchasing risk ladder or find the hottest companies, those things aren’t that helpful anyways. You need to control the money you have now and the money you make now so that it doesn’t disappear.
The most important FIRE skill
Maybe you think you know why saving is important for FIRE but you likely have no idea just how important saving is. It’s the most important FIRE skill you can possibly learn, by far.
‘Booo! I thought this was going to be fun! I hate saving money,’ you’re thinking? Well tough nuts. You have to, it doesn’t have to be painful and the the power of saving will blow you away.
What’s that? You wanted to have your own personal wine tasting every night and saving will cramp your style? Well it doesn’t have to. Read this and then give some thought to that life choice of yours.
The basics are pretty easy. If you don’t save any money, then you have no money to enact further genius schemes to achieve financial independence. This sounds straightforward but the rabbit whole goes deeper than you think. We’ll walk through a few situations to show off just how important this is.
How to reach your full potential
I get it. If you just go straight to figuring some complex stock buying scheme, maybe you will discover you are some sort of money genius and you gain 20% of your money back every year. Wow you are so great. I’m in love…
But since you just went straight to investing you started with $5,000 and didn’t save more over the years. After 10 years you have $25,000 with your amazing skills. Very impressive growth…but really it’s not. In comparison to what you could have done if you’d learned to save some money first – it’s a big pile of poo.
Why is saving important? Without saving you can’t make nearly as much as you could have if you did save regardless of how great you are otherwise.
If you first learned to save your money and enacted some habits to save $5,000 every year, you’d end up miles ahead of your premature friend. If you save $5,000 each year and start investing after 1 year to discover you are also an investment genius you’ll end up with $130,000 after 10 years. That’s more than 5x as much money as if you didn’t figure out how to become a big saver.
Even if you aren’t an investment genius you’ll still beat out someone who’s a super investor if you are a better saver. This is the simple reason to learn to save. It gives you more money to invest, which ends with you having more money even if your investing skills are mediocre.
A good saver will beat out an amazing investor every time.
You can get rich through saving
That values above might have convinced you that saving is important but we worked out those values with $5,000 of saving a year. Really I recommend you try to save A LOT of money. If you have the goal of financial independence you should aim to keep at least half of your income. I would say aim for 60% of your income.
If you can save that much, let’s call it $50,000 a year, then you will have $1,000,000 pretty damn quickly without even needing to do much. Everyone would like to be a millionaire and the path is right there! Saving over half of your money may sound impossible but there are simple ways to get to that point bit this blog is full of ideas.
You can become a millionaire by saving. Who doesn’t want that?
But wait. There’s more! – The more important, less obvious part
Saving money is good, yes that is obvious. The fact that saving is more useful than super investing skills is not obvious but we are just getting started. Now comes the real magic trick that makes FIRE possible.
Let’s flip the script. The more money you save, the less you spend. Ooooo… wait no, you know that already, but if you think about it really hard it has some amazing outcomes. This is what makes saving important for FIRE. Just how powerful this is will blow you away, so hold onto your underpants.
Saving more means spending less. How could this benefit me? Hmmm
This makes sense but the trick is that as you train yourself to need less money you are transforming your life into one that needs less money to sustain itself.
Maybe your house is smaller than that mansion on your vision board, or you have a basement dweller that pays your mortgage. Maybe you opt for a car without the built-in WiFi. Whatever you decide on, YOU NEED LESS MONEY TO KEEP GOING… FOREVER.
This is where the real magic kicks in
We’re talking habits people. When you need less money to live every year you don’t need to save as much before you can retire. If you determine that you need $2,000,000 dollars to be free, you can learn to spend half as much money and magically you only need $1,000,000 to reach financial independence. Now suddenly being free is twice as easy, and you haven’t done anything yet.
Take a look at the graph below, it gets me very exited. But what does it mean, you ask. Well, say you have an income annual income of $100K. Let’s take a look at the last bar. If your expenses are $90K, (that’s 90% of your income, if you need help with the math) you have to save up $1,800,000 to live happily ever after. Eighteen times your annual income.
In contrast, if you learn to live on $20K, (or 20% of your income) you only need $400,000 to reach your financial independence forever (or four times your annual income.) That’s the very first bar.
I don’t want to live off that, you exclaim. That’s fine. I don’t either. Just choose something in the middle.
If you live on less, you don’t need as much to retire.
(Chart assuming a 5% return forever)
If you spend 90% of your income on stuff every year it makes sense you would need to save up a heck of a lot of money to able to spend like that when you have no job.
On the other side, if you learn to only spend 10% of your income every year then you don’t need much to maintain those spending habits with no job. How much do you have to save up? There are a lot of ways to figure it out but the simple way is the 4% rule.
A Beautiful Synergy
Here is where this gets really great though.
When you discover the fact that you NEED TO SPEND LESS AS YOU ALSO SAVE MORE, they combine into a beautiful way to catapult you towards freedom.
Not only do you need less but you save more. SYNERGY!
If you save most of your money, you barely need to save anything before you can maintain that level of spending with no job. At the same time you are saving a lot which makes you get there really quickly.
Pure. FIRE. Magic. *Fireworks! Pow Pow!*
This is where the FIRE escape is. If you save 60% of your annual income you only need to wait 10 years to fart in your co-workers’ faces and run out the door never to return…EVEN if you have nothing right now and you suck at the rest of FIRE skills.
Most people are doomed because they don’t know why saving is important
This is also why most people are doomed to work until they are old and tired. They haven’t figured out why saving is important. If you don’t save much, it’s basically impossible to retire and as you save more you can retire much earlier.
If you save only 5% of your income, you really do have to work for 61 years before you can jump ship. This is how most people live and why you meet 60-year-olds who are nowhere in sight of retirement. Breaks my heart (Poor bastards…show them this site!!).
They didn’t know how powerful saving was and they got distracted by all the other weird stuff. Mutual fund something, bear markets, and political nonsense. Now they are old, tired and trapped.
Its an obvious choice
Even if they had pulled up their pants a bit to get to only saving 10% of their income they could have retired after working for 47 years instead of 61! A few thousand dollars a year to claw back 14 years of your life. That’s an obvious choice.
This is why saving needs to be your number one skill if you want to earn your freedom. Without it you will never get anywhere no matter how hard you try.
See you on the FIRE escape
TL;DR – how saving NOW means freedom SOON
Saving more now leads to more money for future you
Spending less now means future you NEEDS less
Investing skills aren’t nearly as important as saving skills
Saving skills will get you to early retirement decades ahead of your spendy friends